Easy Income Tax: Direct tax reform remains an unfinished agenda, it must be the next government’s priority

The Union cabinet sanctioned, on Wednesday, Rs 4,242 crore to strengthen and enhance the technology backbone of the income tax department. Once done, it should make filing taxes online easier and compress the cycle of tax refunds. This should be seen as part of a series of moves over the last decade to ease the burden of compliance for taxpayers. The outcome is that not only is the process of filing tax returns relatively easier than it was, the refund cycle is also smoother. While process reforms are important, it’s essential not to lose sight of policy reforms.

On the tax front, the undoubted highlight of the Narendra Modi government has been the rollout of goods and services tax (GST), the single most important reform in indirect tax architecture. GST is still undergoing revisions but the important aspect is that it’s here to stay and has set the stage for a common market. Now, the unfinished agenda is direct tax reform. There is room for optimism here as the next government will inherit a blueprint for it.

In November 2017, NDA set up a task force to draft a new direct tax law. The task force is scheduled to submit its report at the end of February, which means the next government can begin work on it right away. In this context, there’s a lesson to be learnt from a similar exercise attempted a decade ago. Reform of tax codes will necessarily involve significant change. If the full potential of a reform package is to be actualised, it’s important to avoid the soft option of picking just the easier parts. The last attempt at direct tax reform was undermined by this problem.

It’s not that there have been no direct tax reforms during NDA. Tax rates for smaller domestic companies, with a turnover up to Rs 250 crore, have been lowered by 5 percentage points to 25%. Similarly, tax rate in the first income tax slab was lowered from 10% to 5% to encourage voluntary compliance. However, direct tax reform will work best when the law is made simpler by simultaneously lowering tax rates and ending exemptions. A cleaner tax code will curb litigation and avoid tax induced distortions in investment decisions. Direct tax reform is the need of the hour.

Source- Times of India.

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